A state of disrepair
November 01, 1998
by Teresa Acklin
Ukraine's grain industry teetering on collapse despite attempts at privatization.By David Williams
Ukraine is a country in transition. It has a population of 50 million and 60,000 square kilometers of land with great potential for development. It is a country with substantial natural resources, primarily its agricultural land.
Universally known as the “breadbasket” of the former Soviet Union, having previously provided the huge population with 25% of its total food requirements, Ukraine is blessed with some of the best soil in the world the famous black earth, or chernozem. The vast tracts of black soil stretching across 41,800 square kilometers (161,400 square miles) could produce enormous quantities of food, given proper management and adequate inputs.
However, after many years of gross agricultural mismanagement and growing crops without adequate fertilizers, much of the soil is now depleted of nutrients and is in dire need of replenishment. The countryside is marked by bare fields, crops choked by weeds and storage warehouses with far too many blackened, shriveled grains.
Despite ambitious government forecasts of increasing crop harvests, Ukraine's agricultural sector is teetering on the edge of total collapse.
While most countries abandoned centralized control of farming long ago, Ukraine has yet to take any significant steps to reform the agricultural sector. Any reform being made is reluctant and usually driven by the major economic aid agencies, in particular the International Monetary Fund. The marketing system for agricultural production has until now been fiercely guarded by the government, which has insisted that it must retain control until the current economic crisis is over. However, the crisis shows no sign of improvement.
In January, the government claimed to have discontinued the mandatory sale of grain to the state at artificially low prices. This claim was repeated in August by Victor Pryvalov, Ukraine's deputy minister for agriculture. However, regional authorities still enforce sales and recent government announcements proclaim that farms “have the right to pay their outstanding debts in grains.” This means that farms are compelled to settle all outstanding debts to the state in grain before any other trade debt can be paid. In 1996 alone, this restrictive activity jeopardized $400 million in Ukrainian grain export contracts.
So, despite the change at the national level, grains may still be commandeered by the regional authorities, who have the freedom to ban grain movement until debts to the regions or state are met. Around 11 million tonnes of wheat are expected to be seized in 1998, leaving very little surplus for commercial trading.
Under economic aid contracts with the U.S. Agency for International Development (USAID), Price Waterhouse Coopers, Iowa State University and Chemonics have worked to cajole the Ukrainian government into privatizing the state grain elevators. Long considered to be a key factor in the government control of the Ukrainian agricultural sector, the transfer of the elevators to private hands is viewed as a vital step in the process of allowing free trading of grain and other agricultural commodities in the country. Progress has been slow and hesitant, but now appears to be moving forward. However, nothing is ever quite as straightforward as it may appear in this former Soviet state, and the process is far from complete.
COMPLEX PRIVATIZATION PROCESS.
The privatization process that has been developed calls for each elevator director to draw up a list of supplier farms and employees and develop a share allocation plan. This must be submitted to the Ministry of Agriculture and Industry, where it must be approved by four separate review committees. This process can take from six months to a year.
Even then, there are several categories of preferential shareholders. Some are employees of the elevator or mill, others are employees of farms that supply the facility. The most contentious is the government itself, which in many cases has insisted on retaining a “temporary stake” of 25% plus one share for five years.
Currently, there are very few private grain elevators in Ukraine, and these have been newly constructed on greenfield sites rather being purchased from the state. Several major international trading companies have looked long and hard at the existing sites on offer and have concluded that none are worth the asking prices.
One reason for the complex privatization process is that, as is common in Ukraine, there are so many interested parties. These include:
The Cabinet of Ministers, which must approve all privatization plans.
Ministry of the Agro-Industrial Complex, which manages the property of state grain enterprises.
State Property Fund/Regional Property Funds, which are state and regional privatization boards.
Khlib Ukrainy, a special subsidiary of the Ministry of AgroIndustry with the prime function of controlling the grain elevator system.
There are 1,264 grain facilities in the Ukrainian state sector. Of these, 26 are quarantine stores, which will remain under state control, and a further 100 enterprises are due to be transferred to Khlib Ukrainy and not privatized. So, the total number of grain facilities that may be privatized is 1,138.
Some elevators within these 1,138 enterprises have subdivisions that store state reserves. These are also prohibited from privatization. Often the state grain cannot be physically separated from non-state grain, making the privatization of the enterprise's property practically impossible.
Only 89 of the 100 retained enterprises have transferred their assets to Khlib Ukrainy and 18 of these had already begun the privatization process, which raises doubts about their true status into question.
In June, the government approved a scheme that would transfer all of the 100 elevators to Khlib Ukrainy and recommended that 18 more elevators be transferred to its control. This violates the terms of the I.M.F.'s External Fund Facility (EFF), which calls for all but 100 elevators to be privatized.
To date, the state has approved the privatization of 361 grain enterprises, all but 101 of which include a 25% plus one share package that will be retained by the state for up to five years. I.M.F. terms required that 100 ex-Khlib Ukrainy elevators sell at least 70% of their shares by June 15 a target that was not met and all but 100 elevators by the end of March 1999.
So far, only 79 ex-Khlib Ukrainy elevators have been privatized to 70%, although an additional 125 elevators have begun to sell shares. The State Property Fund should meet the I.M.F.'s target of 100 elevators privatized by the end of August 1998.
By the end of December 1997, the Cabinet of Ministers approved privatization plans for 99 of the initial list of 100 enterprises. However, the Regional Property Fund and/or State Property Fund must also approve the share allocation plan of every enterprise. Currently, the plans of over 150 enterprises await approval.
In addition to the 443 grain processing enterprises listed by the decree, an additional 696 enterprises are already privatized or eligible for privatization. These include grain procurement enterprises, feed mills, collective farm feed mills and bakeries. Another 100 grain facilities are already privatized under lease agreements that expire in 1998.
International investors may be interested in some of the following enterprises:
Bread products enterprises, or “kombinats,” which are usually integrated flour and feed mills with grain elevators (95 privatizable);
Transport elevators located near to transport junctions, seaports, etc. (72 privatizable); and
Grain procurement stores.
The initial rounds of Ukraine's elevator share sales have not been as successful as had been hoped. In the Odessa region, 28 elevators have been offered for sale, with most being offered on a 100% sale basis (i.e., the state does not plan to retain even a temporary share holding).
The State Property Fund opened the bidding by offering 26% of each elevator's stock at a price 1.41 times its nominal value. However, two of these Odessa elevators were sold to groups of employees at prices just above nominal value. Few of the shares in the other facilities were sold and many of these tenders are being re-announced at lower prices.
There are several reasons for the poor response. In most cases, the number of shares on offer is less than 26%, which does not allow an investor to gain complete managerial control over the enterprise. Also, the offer price is higher than most investors are prepared to pay, especially in view of the dilapidated condition of many facilities. Future additional investment requirements and management terms are an added deterrent. Finally, investors are discouraged from entering the market by the potential involvement of Khlib Ukrainy as manager of the state's share in the “privatized” elevator.
FEW OPTIONS FOR INVESTORS.
Both foreign and domestic investors can purchase elevator shares from the privatization share auction or by purchasing shares from individual shareholders.
The majority of shares are allocated to suppliers, workers and management. Since the Ukraine government intends to retain a share in many elevators, this prevents strategic investors from gaining a controlling interest in a facility by directly participating in the privatization process. Portfolio investors, however, can buy shares through privatization auctions, which will continue through December. A foreign investor cannot directly participate in an auction but must use a local broker.
The Kyiv Stock Exchange will sell small packages of shares of up to 15% of the total stock of any enterprise and sales by cash tender will be arranged for packages of shares representing 15% to 26% of the company stock.
Investors who want to increase their holdings must approach existing shareholders, who were allocated their shares during the preliminary distribution to employees and suppliers. These can be purchased directly or through a broker.
The use of this system makes it difficult for an investor, particularly one based overseas, to gain a controlling interest within a short time frame. Unfortunately, it also deters some interested parties who do not have the time available to identify, find and negotiate with the scattered shareholders.
The grain storage and distribution facilities are divided into several categories. Grain procurement enterprises receive grain from the farms and clean and dry it before storage. Many have railway spurs, which enable the grain to be loaded onto railcars.
For the most part, these elevators are small, flat stores built of brick or stone. Many date back to the early 1930s and almost all are built to a standard pattern, which is similar to the “universal” state farm building. They are approximately 15 meters (45 feet) wide and 60 meters (200 feet) long, with a height to eaves of around 3 meters (10 feet), giving a nominal capacity of 2,000 tonnes.
The roofs are of asbestos cement sheeting over timber boards supported on round wooden poles. The floor is usually asphalt and often incorporates underfloor ventilation ducts, with a central channel for a lengthwise unloading belt conveyor. This is covered by wooden slats, which are removed as the store is emptied. Axial flow fans are fitted to the ends of these ducts, outside the buildings, to enable the store to be ventilated and cooled.
The stores are generally filled by an overhead belt conveyor. However, the height of the stores is often insufficient to achieve a complete fill from this belt, so soldiers or even school children are regularly drafted by the elevator manager to shovel grain to the sides of the buildings.
In most cases, a small bucket loader is needed to unload the store, although some do have sloping floors. The loading machines are manually operated and the working conditions of swirling grain dust and exhaust fumes from truck engines can only be imagined.
Because of the method of construction, effective insecticide treatment or fumigation is impossible. Indeed, several of the most effective insect control materials, including aluminum phosphide, are not permitted to be used in Ukraine. The myriad of cracks, crevices and holes in the rough timber roof frames and walls provide ideal habitats for storage pests and the common practice of leaving ventilation ducts uncovered makes them a haven for rats.
Crop yields in Ukraine are seriously below the potential production. Of the crops that are harvested, between 25% and 60% are lost due to poor storage and distribution.
There are a number of elevators connected to flour and feed mills or river and seaports that are a little more attractive to potential investors. These have vertical stores that are most often constructed from flat concrete panels and storage cells three meters square and 30 meters high. Each cell has a storage capacity of 200 tonnes of wheat, but individual cells are regularly linked to form storage units of up to 1,200 tonnes. Unfortunately, these suffer from the same lack of investment that affects the entire agricultural sector and much of the handling equipment is of very low capacity.
These narrow storage cells are notorious for bridging, especially when the grain is damp or inadequately cleaned, so the grain needs to be prodded and poked to make it flow. This is a difficult and very dangerous process.
Ventilation systems are almost unknown in this type of store, so it is impossible to condition the grain while in store. Once again, the vertical and horizontal joints between the slabs provide ideal breeding sites for insect pests.
Most elevators have temperature monitoring systems, but these are of an obsolete design and frequently are poorly maintained. The endemic lack of funds pervades everything.
Open belt conveyors are almost universally used and generate substantial quantities of dust whenever grain is moved. Apart from the obvious danger of moving belts, there is a significant hazard to the health of workers and of dust explosions.
Because the Ukrainian grain industry has been insulated from world economic forces for so long, there has been little necessity to introduce high-capacity transport systems or automation, so operations are slow and inefficient when compared with the rest of the world.
Generally, conveyors used for loading and unloading transport have a maximum capacity of 100 tonnes per hour. There are barge loading conveyors that can handle only 30 tonnes per hour.
Several models of mixed and cross-flow grain dryers are used, but these are usually very inefficient and lack adequate control systems. Modern dryers could be installed and could be entirely self financing through energy savings alone. Unfortunately, neither the government agencies or elevator employees have the funds or collateral to install new equipment.
Many of the grain storage facilities in Ukraine are clean and brightly painted, at least on the outside. This is quite typical of the whole country. But inside is a complex tangle of legal and fiscal rules and regulations, which are intended to protect the interests of government agencies and so invariably prevent smooth operation of commercial business.
David Williams is a British agricultural engineer and international grain storage consultant currently working in Russia and other countries in the former Soviet Union. He has produced a manual for the United Nations' Food and Agriculture Organization on the operation and maintenance of bulk grain storage and handling equipment.